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Equity crowdfunding for non-accredited investors can change the market

iCrowdNewswire - Oct 29, 2015

Title III is the equivalent of a massive deregulation on investment. That’s what the entire JOBS Act is, in the end: a set of exemptions from SEC regulations, with softer rules for crowdfunding scenarios.

Deregulation tend to be beneficial to businesses. Title IV, although focused on accredited investors, allowed a number of new companies to advertise their fund-raising goals and collect billions of dollars from a small number of individuals. Now with Title III about to come up, the expectations are huge.

SEC has been very careful about Title III. They took 3 ½ years to come with a set of rules in order to allow the market to flourish while protecting small investors. The latter is the main point. Since SEC enacted regulations on equity investments in the 1930s, only accredited investors are allowed to take them. Not only that, those offers cannot be publicly advertised. They must be offered to investors in a private manner instead. The main reason alleged is that only accredited investors are sophisticated enough to properly evaluate a business opportunity and calculate the hidden risks.

Those regulations came after millions of people lost a lot of money during the 1929 crisis. They were not, however, widely followed around the world. Although most countries have stricter regulations on equity than America, most of them do not differentiate between accredited and non-accredited investors.

Now that’s changing: not only businesses can now publicly advertise they are issuing securities, they can also offer that to everyone, under certain rules. A change that has the potential to reshape the landscape of investments.

Before Titles III and IV, the only way an entrepreneur without assets could raise funds was going to a venture capital company, waiting in the line to have his business proposal analyzed and then get funds, if successful. That generated some market imbalances that allowed investors to get hundreds or thousands of times their initial investment in return. And lots of good projects did not receive adequate funds.

Now a good project can raise money directly. In the long run, as equity crowdfunding becomes popular among the masses, we can expect entrepreneurs giving up less of their own companies in exchange for more funds. That does not mean venture capital companies will be dead. Instead, they will compete against smaller investors in the best projects.

Whether bad projects will tend to receive more funding is open for debate. That will probably happen. But if crowdsourcing platforms are an example of where the market will go, we can only expect that the best projects and entrepreneurs will have much more room to show up.